Financial Audit: Federal Family Education Loan Program's Financial
Statements for Fiscal Years 1994 and 1993 (Letter Report, 02/26/96,
GAO/AIMD-96-22).

GAO reviewed the financial audit prepared by the Education Department's
Office of Inspector General (OIG) on the Federal Family Education Loan
Program's financial statements for fiscal years 1994 and 1993. The OIG
was unable to express an opinion on the financial statements as a whole
because student loan data on which the Education Department had based
its costs to be incurred on outstanding guaranteed loans were
unreliable. In addition, the OIG continued to report material weaknesses
in internal controls related to the program's liabilities for loan
guarantees and related program costs, effectively monitoring payments to
guaranty agencies and lenders, and ensuring accurate financial
reporting. Although internal control weaknesses persisted during fiscal
year 1994, the Education Department has been trying to correct these
shortcomings. GAO reviewed the OIG's work and concurs in its findings.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-22
     TITLE:  Financial Audit: Federal Family Education Loan Program's 
             Financial Statements for Fiscal Years 1994 and 1993
      DATE:  02/26/96
   SUBJECT:  Financial statement audits
             Internal controls
             Data integrity
             Student loans
             Computer security
             Accounting procedures
             Loan accounting systems
             Proprietary data
             Financial management systems
             Financial records
IDENTIFIER:  Federal Family Education Loan Program
             Guaranteed Student Loan Program
             Dept. of Education National Student Loan Data System
             Dept. of Education Central Automated Processing System
             National Direct Student Loan Program
             Federal Family Education Loan Program Information System
             
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Cover
================================================================ COVER


Report to the Congress

February 1996

FINANCIAL AUDIT - FEDERAL FAMILY
EDUCATION LOAN PROGRAM'S FINANCIAL
STATEMENTS FOR FISCAL YEARS 1994
AND 1993

GAO/AIMD-96-22

FFELP Financial Statements

(917068)


Abbreviations
=============================================================== ABBREV

  EDCAPS - Education's Central Automated Processing System
  FFELP - Federal Family Education Loan Program
  NSLDS - National Student Loan Data System
  OIG - Office of Inspector General

Letter
=============================================================== LETTER


B-258863

February 26, 1996

To the President of the Senate and the
Speaker of the House of Representatives

This report presents the result of our review of the Department of
Education's Office of Inspector General's (OIG) financial audit of
the Federal Family Education Loan Program's (FFELP) Principal
Financial Statements and its internal controls and compliance with
laws and regulations for the fiscal year ended September 30, 1994. 
We conducted our review pursuant to section 432(b) of the Higher
Education Act of 1965, as amended (20 U.S.C.  1082(b)). 

This is the third year the FFELP's Principal Financial Statements
were prepared.  The OIG was unable to express an opinion on the
financial statements taken as a whole because student loan data on
which Education based its costs to be incurred on outstanding
guaranteed loans (referred to as liabilities for loan guarantees),
was not reliable.  In addition, the OIG continued to report material
weaknesses in internal controls related to determining FFELP's
liabilities for loan guarantees and related program costs,
effectively monitoring payments to guaranty agencies and lenders, and
ensuring accurate financial reporting.  Although internal control
weaknesses persisted during fiscal year 1994, Education has been
working towards correcting these weaknesses.  We reviewed the work of
the OIG and concur with its reports. 

We are sending copies of this report to the Secretary of Education,
the Inspector General, and other Department officials.  We are also
sending copies to the Director of the Office of Management and
Budget, the Chairmen and Ranking Minority Members of the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight, and other interested congressional
committees.  Copies will be made available to others upon request. 

This report was prepared under the direction of Lisa G.  Jacobson,
Director, Accounting and Information Management Division, who may be
reached at (202) 512-9095. 

Charles A.  Bowsher
Comptroller General
of the United States


Letter
=============================================================== LETTER


B-258863

To the Secretary of Education

Legislation\1 requires the Department of Education to prepare annual
financial statements for the Federal Family Education Loan Program
(FFELP) and requires the Comptroller General and Education's
Inspector General to audit these statements.  Fiscal year 1994 was
the third year that FFELP's Principal Financial Statements were
prepared, and data reliability problems continued to preclude the
auditors from rendering an opinion on three of the four statements. 
Although internal control weaknesses persisted during fiscal year
1994, Education has been working towards correcting these weaknesses. 

Education's Office of Inspector General (OIG) was required to audit
the FFELP Principal Financial Statements for the fiscal year ended
September 30, 1994, and issued its report dated May 8, 1995.\2 (See
appendix I.) For fiscal year 1993, we worked with the OIG in an
effort to audit these statements and jointly issued a report dated
May 20, 1994.\3 The joint report covering fiscal year 1993 did not
include an opinion on the Statement of Financial Position, Statement
of Operations and Changes in Net Position, and Statement of Budgetary
Resources and Actual Expenses because the student loan data on which
Education based its costs to be incurred on outstanding guaranteed
loans (referred to as liabilities for loan guarantees) was not
reliable.  We were able to determine, through detailed audit
procedures, that the fiscal year 1993 Statement of Cash Flows
presented fairly the cash actually received and disbursed by FFELP. 
However, because of the material internal control weaknesses
identified, we could not determine if the cash Education received or
disbursed was all that it should have. 

For fiscal year 1994, the OIG was unable to express an opinion on the
financial statements taken as a whole because of the previously
reported data reliability problems.\4 We concur with the OIG's
disclaimer of opinion.  Further, we also concur with the OIG that the
fiscal year 1994 Statement of Cash Flows presents fairly, in all
material respects, the cash actually received and disbursed by FFELP. 
However, because of the material internal control weaknesses
identified, the OIG could not determine if the cash Education
received or disbursed was all that it should have. 

For fiscal year 1994, the OIG reported that material weaknesses in
FFELP's internal control structure existed.  These material
weaknesses, which were previously reported, relate to determining
FFELP's liabilities for loan guarantees and related program costs,
effectively monitoring payments to guaranty agencies and lenders, and
ensuring accurate financial reporting.\5 We concur with the OIG's
findings.  As part of a financial audit, the OIG is not required to
and therefore did not express an opinion on internal controls. 
However, the above material weaknesses resulted in ineffective
controls over safeguarding assets and assuring that there were no
material misstatements in FFELP's Principal Financial Statements. 

The OIG also reported that improvements in Education's policies and
procedures related to cash reconciliations, loan receivables, and
controls over an information subsystem were needed.  We agree with
the OIG's assessment and related recommendations in these areas. 

Further, we concur with the OIG that with respect to the items
tested, FFELP complied in all material respects with the provisions
of laws and regulations tested.  However, since such tests were
limited to selected provisions of laws and regulations, this
conclusion does not represent an overall opinion on compliance with
laws and regulations for fiscal year 1994. 

For fiscal year 1994, the OIG also reviewed the financial information
in management's Overview of the Reporting Entity and did not report
any material inconsistencies with the Principal Financial Statements. 
However, as noted by the OIG, this information was generally derived
from the same sources as the information presented in the Principal
Financial Statements.  Consequently, we believe that because of
ineffective internal controls and unreliable student loan data, the
reliability of information presented in the Overview of the Reporting
Entity cannot be reasonably determined. 


--------------------
\1 Section 3515 and 3521 of title 31, United States Code, and section
432(b) of the Higher Education Act of 1965, as amended (20 U.S.C. 
1082(b)). 

\2 Financial Statement Audit:  U.S.  Department of Education Federal
Family Education Loan Program for the Years Ended September 30, 1994
and 1993 (ACN 17-40302). 

\3 Financial Audit:  Federal Family Education Loan Program's
Financial Statements for Fiscal Years 1993 and 1992 (GAO/AIMD-94-131,
June 30, 1994). 

\4 See footnote 3 and Financial Audit:  Federal Family Education Loan
Program's Financial Statements for Fiscal Year 1992 (GAO/AIMD-93-4,
June 30, 1993). 

\5 See footnote 4. 


   BACKGROUND
------------------------------------------------------------ Letter :1

FFELP, established in 1965 and formerly known as the Guaranteed
Student Loan Program, is the largest postsecondary education loan
program of the federal government.  Its primary mission is to
increase postsecondary education opportunities for eligible students
who otherwise may not be able to further their education.  As of
September 30, 1994, Education reported an estimated $77 billion in
outstanding loan guarantees, about $23 billion of which was
guaranteed in fiscal year 1994 alone. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :2

To meet our audit responsibility and to avoid duplication and
unnecessary expense, we reviewed the OIG's work.  To determine the
reasonableness of the OIG's work and the extent to which we could
rely on it, we

  reviewed the OIG's audit methodology and planning;

  evaluated the qualifications and independence of the OIG's audit
     staff;

  participated in tests of cash receipts and disbursements;

  reviewed the OIG's working papers to determine compliance with
     generally accepted government auditing standards and Office of
     Management and Budget (OMB) Bulletin 93-06 "Audit Requirements
     for Federal Financial Statements," including assessing the
     appropriateness of (1) the nature, timing, and extent of
     substantive tests performed, (2) the evaluation of the entity's
     internal controls, and (3) the testing of compliance with
     significant provisions of selected laws and regulations; and

  read the financial statements and the OIG's May 8, 1995, report to
     evaluate conformity with (1) the other comprehensive basis of
     accounting stated in note 2 and (2) OMB Bulletin 94-01, "Form
     and Content of Agency Financial Statements."

Our work was conducted from October 1994 through June 1995 in
accordance with generally accepted government auditing standards. 


   INTERNAL CONTROL WEAKNESSES
   PERSIST BUT SOME CORRECTIVE
   ACTIONS ARE IN PROGRESS
------------------------------------------------------------ Letter :3

Consistent with prior GAO and OIG reports, the OIG concluded that

  FFELP's liabilities for loan guarantees and related program costs
     were primarily calculated using models which continued to be
     based on student loan data found to be unreliable;

  Education did not have systems or procedures in place during fiscal
     year 1994 to ensure that individual billing reports submitted by
     guaranty agencies and lenders were reasonable; and

  the financial reporting process\6 did not ensure that financial
     statements and other management reports were reliable. 

Education has made some progress in addressing these issues.  It has
begun implementing the National Student Loan Data System (NSLDS)--the
first national database of loan-level data.  According to the OIG,
although NSLDS was not designed as a financial system, it could
provide valuable information on characteristics of Education's loan
portfolio that would be useful in estimating program costs.  However,
as noted by the OIG, the usefulness of this data depends on its
accuracy and validity.  As a result, we agree with the OIG's
recommendation that Education needs to test the accuracy and validity
of the loan data in NSLDS.  Education is currently working with a
contractor to identify and verify critical data items in NSLDS. 

In March 1995, the OIG issued an audit guide requiring all lenders
participating in FFELP to have an annual compliance audit by a
nonfederal auditor.  The purpose of these audits is to obtain auditor
attestations regarding lenders' assertions that their respective
requests for payment of interest and special allowances are accurate,
complete, properly classified and computed, and supported by adequate
loan documents.  Education will need to monitor implementation of the
audit guide requirements to ensure that it receives those assurances
regarding the accuracy of lenders' billings. 

Education is redesigning its current financial management systems
into a newly integrated core financial system called Education's
Central Automated Processing System (EDCAPS).  The Financial
Management Systems Software module within EDCAPS will replace the
current antiquated and inefficient general ledger system and is
expected to directly produce the FFELP financial statements.  This
module is expected to be implemented in fiscal year 1997. 

In addition, Education has initiated a task order with the FFELP
information system contractor to develop permanent subsidiary ledgers
supporting general ledger balances and to improve the interface
between the FFELP subsidiary systems and the general ledger system. 
As reported by the OIG, one of the primary purposes of these
improvements is to provide a detailed audit trail for all
transactions posted from the subsidiary systems to the general ledger
system.  If successful, these initiatives should assist Education in
addressing identified financial reporting problems. 

We have separately reported on Education's computer general controls
over FFELP's information system.  We continued to find weaknesses in
that system's ability to adequately protect sensitive data files,
applications programs, and systems software from unauthorized use.\7
Effective computer general controls over FFELP's information system
are critical to safeguarding assets, maintaining sensitive student
loan data, and ensuring the reliability of financial management
information.  Education reported that it has acted to correct the
weaknesses identified, such as implementing new security oversight
procedures and working with the information system contractor to
remedy access and software control problems.  Future audits should
determine the effectiveness of these and other corrective actions. 


--------------------
\6 The financial reporting process includes analyzing, evaluating,
summarizing, reconciling, adjusting, and reclassifying information so
that it may be reported to management and/or outsiders.  Accounting
and information systems supporting FFELP are an integral part of this
process. 

\7 Federal Family Education Loan Information System:  Weak Computer
Controls Increase Risk of Unauthorized Access to Sensitive Data
(GAO/AIMD-95-117, June 12, 1995). 


   STATUS OF PREVIOUS
   RECOMMENDATIONS
------------------------------------------------------------ Letter :4

Education has made some progress in addressing prior years'
recommendations.  Of the 21 recommendations made during the past 2
years, 8 have been closed and action was in progress or planned for
11.  Of the remaining 2, one requires congressional action and no
specific action was planned for the other.\8 Until corrective action
is completed on all prior year recommendations, we continue to
reaffirm open recommendations included in the OIG's report on FFELP's
Principal Financial Statements for fiscal years 1994 and 1993. 
(These prior years' recommendations are reprinted on pp.  65 and 66
of this report.)


--------------------
\8 No action was planned for the study of the feasibility of
requiring guaranty agencies to standardize their FFELP loan
accounting systems because Education believes that the role of the
guaranty agencies is expected to be significantly phased down as a
result of the Federal Direct Student Loan Program. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

Officials in Education's Office of the Chief Financial Officer and
Office of Postsecondary Education reviewed a draft of this report and
generally concurred with the conclusions.  Their comments have been
incorporated where appropriate.  Consistent with their comment on the
OIG's report, Education officials disagreed with the conclusion that
unreliable loan data prevents them from reasonably estimating FFELP
liability costs.  They believe that the estimates of liabilities for
loan guarantees and subsidy expenses are reasonable because prior
years' estimates were consistent with actual cash flows.  However, we
agree with the OIG that there was insufficient reliable audit
evidence to support management's estimate.  Education officials
advised us that they are developing a methodology they believe will
produce auditable and verifiable estimates of liabilities for loan
guarantees and subsidy expenses. 

Charles A.  Bowsher
Comptroller General
of the United States

June 30, 1995


EDUCATION'S OIG REPORT ON FFELP
FINANCIAL STATEMENTS FOR FISCAL
YEAR 1994
=========================================================== Appendix I



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